John Fairfax Holdings Limited
ACN 008 663 161

Prof. Fred Hilmer, CEO Fairfax
Reporter: Michael Pascoe

REPORTER:

Mr Hilmer, Project Hercules. Forty million dollars in cost cutting seems to have delivered in these results, but is it over?

PROFESSOR FRED HILMER - FAIRFAX:

Well, the cost cutting isn’t over, though, Michael, we want to do it in a different way. Hercules was a good way to bring people’s attention to costs and it allowed us to get rid of some obvious costs that had built up over the years, and I think that happens in any organisation. But if we want to go forward, we’re going to need a much more bottom-up driven cost reduction approach.

So, we want to get ideas off the fellows in the printing plant, off the people who are taking the flow of ads, off the people who are producing the material, the terrific content that we have in our publications. And what we ’re doing now is we’re moving much more to continuous improvement where we’ re trying to teach our people to look at process, to look at how we do things today, and for them to ask can we do it better?

REPORTER:

And with that is there a target on how much further you can cut costs?

HILMER:

I think what we want to do now is move into a steadier cost containment environment and what we’re trying to target over time is a total level of earnings. There are going to be times when we’ll save and will want to reinvestment. There’ll be times when we’ll save and we’ll want to bank the savings.

But what we did last year in Hercules, when the company announced that forty million target, was signal to the market that Fairfax was going to get on top of its costs. We’ve done that, and now what I want to signal to the market is that we want to manage not just one variable of our profit base, but we want to manage the totality of our profits.

REPORTER:

So you can look to a lower cost percentage again this financial year?

HILMER:

I’m not prepared to make forecasts about what our various percentages will be. What we’re managing the company to is a level of profitability and we will make, as we see it appropriate, investments and we will take costs out in a measured way with much more of a bottom-up focus.

REPORTER:

Have you any pricing power on the other end?

HILMER:

We’re in markets that are increasingly competitive. We have to look very carefully at where we have good value - and where there is therefore room to take price up - and in other areas where we believe we want to build some volume or where we want to hold prices.

We’ve had reasonable performance in terms of yield - that was important in the last result - and we’ve had a good start this year. The price changes that we put into the markets - some of which are mixed, some of which are absolute levels - seem to be quite well received.

REPORTER:

On the content side, editorial side, of your business, there’s no cost cutting available there any more, is there, or is there?

HILMER:

Well, I believe that over time we can continue to cut costs everywhere. I think there are ways that we can do things. We share a lot more copy now. We ’re bringing a lot of our groups together. Last year we made the decision to bring all our business publications together under Michael Gill. That’s given us opportunities. We have increasing cooperation between The Age and The Sydney Morning Herald and I think you see a lot of our lead columnists and stories appearing in both.

So, I don’t believe you ever stop this. I believe you can always find ways to do things better. It started with people like Toyota. I think Gerry Harvey’s a great example of taking what is a mature business, mature industry, and saying hey we can do this differently, we can find different formats.

REPORTER:

At the same time as you’re trying to improve productivity then, get costs down, you’ve got Fairfax Online chewing up money. Have you found a way yet to make money out of the Internet?

HILMER:

Look, we are spending money and we’re spending money because we believe it’s an important potential area for us. There’s no guarantees but the amount of money that we’re spending is quite small. The Internet loss on an economic basis last year - not on a consolidated accounts basis - was in the order of about twenty million dollars and you have to see that against a cash flow of over three hundred million dollars.

When we launched The Fin Saturday edition, we spent five million dollars and so those kinds of expenditures are, I believe, well within the capacity of a company like ours, and one of the things that I really want us to do is be a little more aggressive, to get out there and to try things. You know, the day we only do sure things is the day we start shrinking and I think the Internet for us is a reasonable bet.

Now you can have good bets that lose and you can have bad bets that win but I think it’s a reasonable bet, it’s an important bet for us, it gives us a chance to get into a new medium that I believe, over time will go and what we’re trying to do in the Internet is build a number of different platforms that hang off our content and that make sense, and that give us a shot at making some money as this medium matures.

It took us ten years to get our weekend magazines profitable and so as a company, we have a long experience in understanding to build audience, on new platforms and then to build the credibility of advertisers so they pay you for it, takes time, but we have a very strong cash flow and I believe it ’s prudent that we keep doing that.

And not just on the Internet, we’re doing it with new magazine titles, we’re doing it with enlivening our existing titles. I want to see us reinvest in the business and drive the business more for growth then just sort of sitting on a couple of big mastheads and saying, isn’t it great?

REPORTER:

But within the Internet then, you do see it as an advertising medium, that’s where you think you’re going to make money out of it?

HILMER:

No, I didn’t say that. I think we see it as a medium where we will draw an audience and the audience will do things with us and we will have some of their time and out of that time and out of the credibility that comes from the content that our editorial people produce, we have opportunities to make revenue.

There are three or four different types. Advertising clearly, that’s what we ’ve come from, that’s a natural for us. Transactions increasingly, because transactions are really only another side of advertising. I mean, advertising is where you take a part of the transaction on a no risk fixed basis. Maybe we’ll share the risk and take a transaction fee.

Directories are increasingly important on the Internet and our city search business where we’re offering merchants web sites, something like over five thousand now, where we’re integrating what we do in big colour pages and we’re trying to build a directory business is a form of revenue.

Sold.com, which is now a leading auction site, is producing significant revenue already relative to you know what is a very new site, and that’s a share of transactions. So I believe there are a number of ways to earn revenue and what we’ve got to do is try.

REPORTER:

In the meantime, aren’t you cannibalising some of your existing advertisers, the content that attracts people to your publications, you’re giving away without the advertising that goes with them?

HILMER:

Well, what we are seeing, is that we’re actually developing some new streams. The directory business is new advertising streams and that was something like forty per cent of the Internet revenue. That’s an entirely new revenue stream for us. Sold.com, the auction business is an entirely new revenue stream. That’s the lower end of classifieds that have been in places like Trading Post. We’ve moved them out of the big papers through our pricing structure and now we’re bringing them back in through the Internet.

REPORTER:

There’s still no decision on floating or not floating Fairfax Online, haven’ t you substantially missed the boat to cash in on the Internet bubble?

HILMER:

Well, we’re going through a careful and systematic process, it’s an issue Michael which is clearly very market sensitive and when we’re ready to talk about it, I’ll be delighted to come back and talk about the decision we’ve made. But what I want to say is that our focus is not on the stock market. In the Internet our focus is on building the businesses and we launched seven web sites in the last year, literally one every two months and we’re launching a number of web sites this year, including some very exciting developments in portals, a real estate site which is building off a very strong real estate position we already have in Fairfax at market and I see that that’s where we’ve got to keep ourselves focused, not on the financing which is something that we’re looking at in a measured way with very good advice and as I say, when we’re ready to talk about it I’ll be delighted to come back.

REPORTER:

Well let’s leave there, thanks for talking us.

HILMER:

Thank you.

Transcript supplied by Rehame Australia

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